Wealth Accumulation
Wealth accumulation is ridiculously simple. You do not need to be a genius, or lucky, or even have special connections. You do not have to attend overpriced financial seminars or learn the gimmicks and tricks sold by marketers.
Wealth accumulation is so simple that it can be explained in two sentences:
- Spend less money than you earn and invest the balance wisely.
- Develop daily habits that lead to wealth accumulation.
Simple enough.
So, why do most people find it difficult to accumulate wealth? This is because people generally treat money with a surprising amount of disrespect considering that, “Money makes the world go round.”
If you want to attain wealth in this lifetime, respect the power of money to transform and improve your life, your families, and society in general. Implement the essential wisdom provided above to achieve great financial success.
Wealth Accumulation Step 1:
Spend Less Money Than You Earn and Invest the Balance Wisely
This statement summarizes how to manage your finances so that you can grow assets. It teaches the importance of creating and increasing positive cash flow to invest and produce additional positive cash flow.
Notice that the following three separate but connected ideas form wealth accumulation’s first step:
- Spend less
- Earn more
- Invest wisely
Image via Financial Mentor
There are endless variations that you can follow to achieve this objective, but there are two underlying themes:
Immediately reduce spending through various forms of frugality
Increase your income by implementing multiple strategies, for example, work overtime, change jobs, get a pay raise, or start a business
The twin themes of reduced spending and earning more money are not mutually exclusive. However, they do require incredibly different mindsets.
Frugality
Frugality focuses on utilizing self-discipline to “deny self” and live on less. Most people do not like the notion of self-denial, thereby making it difficult for them to cut back on their expenditure. If this describes you, frugality will be a problematic and slow path to wealth because you will be caught up in an emotional dance between your goal for financial freedom and your lifestyle desires.
For others, frugality is an enjoyable journey because it simplifies their lives. They receive fulfillment from redirecting income toward achieving their financial goals versus squandering it on spending. An extremely frugal person will find it easy to save 70% of their income through self-denial, in less than 10 years!
Increase your income
The other side of the equation is to raise one’s income. The benefit of this strategy is that your earning capacity is unlimited – you can earn as much as you believe you can! As a matter of fact, most wealth gurus harp on and on about making more money in order to be on the “fast path” to wealth. The risk with this line of thinking is that if you spend more than you “make,” you will ultimately lose all your wealth!
So, it is best to focus on both sides of the equation – spend less and make more money.
Invest
Investing money is the third part and most straightforward of the equation. Most importantly, there’s lots of information to help you invest online and in libraries. To become a prudent investor, you don’t need to enroll in an expensive investment course or have extraordinary financial expertise. For specific information on wealth accumulation or building strategies, read our article “Wealth Building Strategies.”
Wealth Accumulation Step 2:
Develop Daily Habits That Lead to Wealth Accumulation
Adopt good habits that lead to wealth. An effective formula that you can implement is:
[(Small, Smart Choices) x (Consistency) x (Time)] = Wealth
Procrastination is a significant wealth deterrent. Think about it; you will:
- Start budgeting – someday
- Reduce your spending – someday
- Start a business – someday etc
We are often aware of what we need to do to improve our financial situations, and we even make plans to accomplish those tasks at some point in the future, but we keep prioritizing less essential facets of our lives, to the detriment of our accumulating wealth.
Action is what is needed and is where the rubber meets the road. Good financial habits are what make supermarket cashiers become billionaires, while lottery winners squander their wealth.
There is scientific reasoning behind developing sound money habits, resulting from mathematical studies on how money compounds to become great wealth.
Take Note:
The reason daily habits and small changes are so important is that:
- A daily practice of frugality allows you to save small amounts of money every day. These amounts when saved and invested, grow over time, to become substantial wealth
- A daily habit of learning and implementing investment strategies will ultimately increase your earning capacity
Good daily habits compress the wealth accumulation process into manageable bite-sized pieces. These effects, compounded over a lifetime, become massive wealth.
Taking on Debt
The next essential phase of good financial health is learning how to make wise choices about debt and credit. Always have your bottom line in mind, that is, your net worth, when deciding to get credit. And this is because:
Assets – Liabilities = Net Worth
When you take on debt, you are, in essence, reducing your net worth. Each time the opportunity to get credit arises, ask yourself, “Am I accumulating wealth and increasing my net worth, or am I reducing my net worth via my incurring debt?”
Be sure to verify your financial situation by answering the two questions below.
Am I Ready to Take on Credit?
You are not ready to take on debt if you do not have a spending plan or a budget. Build a strong financial foundation before taking on credit obligations. For example, organize your financial records, set goals, start saving money, and obtain insurance to protect your assets.
Become smart and use your credit card only as a tool. Pay off your card balances promptly every month. The penalty for not paying off your credit balance means paying interest, 20% or more every year, on purchased items. This is the negative side of compound interest because, in this instance, it reduces wealth rather than increases it.
When you get a loan, credit card, or any type of credit facility, ensure prompt repayment on the amount borrowed (principal) and any associated interest.
Cost of Credit
Find out the precise details of a loan or credit, before you borrow. Establish the annual percentage rate (APR), interest rate, fees, and penalties for early and late repayment and finance charges. Also, realize that your credit score will determine the cost of credit.
Make an Effort to Control Your Debt
Find out how much debt you’re in so that you can develop strategies to manage your debt.
For example, if you have 3,500 in debt, analyze your debt, develop a strategy, and take action:
- List the balance, interest rate and monthly interest amount on each credit card
- Check your credit score and shop for a new credit card at a better price. Transfer your balance to the new card
- Cut up your old credit cards and use the interest saved to pay off your principal balance sooner
A question that is commonly asked is, “Should I focus on growing my savings and retirement fund or pay off debts?” The suggested order of prioritization would be:
Prioritize
- First, fully fund all your tax-deferred retirement plans
- Second, pay down any debt with remaining capital. Pay off urgent balances and then strive to pay off the entire debt urgently
- Third, build post-tax savings to create a small nest egg to alleviate temporary hardship, until debt is fully paid off. Go big after that
If it is not possible to do any of the above, find ways to increase your income, and then follow the above-recommended steps.
It is also crucial that you build your investment skill while your capital is still small, and when paying down debt. Learning the ropes of investment will allow you to make mistakes early with lesser dollar amounts. The value of this education cannot be overstated because compounded over a lifetime; you could save a fortune that would otherwise be lost in investment errors.
Choose the Right Loan to Save Money
With good credit, you may choose to take out a loan to cover educational expenses or buy a house – both are investments in the future. Regardless of how you spend your money, a loan is debt, a liability, and it decreases your wealth. Therefore, choose loans carefully.
Shop around and negotiate for credit and loans that have the lowest interest rate. Use the interest you save to build wealth. Obtain your credit score before you start shopping for a loan. A high credit score can lower your interest rate because you are a reasonable risk.
Use online loan calculators and comparison websites to ascertain the lender who will charge you the lowest interest. Increase your monthly payments to save on interest expenses, or choose shorter payment terms on your loans.
Avoid High-Cost Credit
People can get into serious debt when they take out loans against a car title or paycheck. These loans usually come with very high-interest rates, in the double-digit range.
For example, a borrower may write a postdated check to get a loan. They repay their loans from their wages, hence the term “payday loan.” Borrowers who do not pay off their loans in the agreed time are charged additional fees to get an extension, which gets them deeper in debt.
Borrowers who to continue to pay fees to extend the loans due date indefinitely ultimately find themselves deeper in debt, due to steep interest payments and fees. These predatory lenders target low-income people and seniors who they contact in person, by phone, and by mail.
Obtain and Maintain Good Financial Reputation
Every month refer to your budget and create a plan to ensure that your bills are paid on time. Set up direct deposit and put bills on auto-debit to help maintain a good name and reputation.
For example, if you get paid twice a month, you can pay for your mortgage, utility bills, and cable with the first check via auto-debit or direct deposit. Out of your second check, make your car payment through auto-debit and also debit some money into your savings account. Having your payments automated simplifies both budgeting and saving.
Guard Your Identity
In the same manner that you protect your home with locks for your doors and windows, take steps to protect your identity. Secure your Social Security number and card, all passwords and PINs, and your financial records. Periodically check your credit report to be aware of any illegal use of credit products that are in your name. In the instance that you discover unauthorized access, immediately contact the credit reporting companies Equifax, Experian, and TransUnion to place a fraud alert on your SSN and name.
Protect Your Wealth
Protect your personal wealth by acquiring insurance. People purchase insurance to protect themselves from financial loss. Insurance promises to reimburse a loss from premiums paid in advance. Consumers should shop carefully for insurance covers that meet their needs and which offer the best deal.
Solid credit history is vital because insurers use credit information to package and price certain types of insurance policies. While you can buy all sorts of insurance covers to protect you from all kinds of risks, ensure that you have the three essential insurance covers – property, health, and life insurance.
Property Insurance
Auto Insurance
State laws mandate that all motor vehicles must have liability insurance to cover damage to property or injury to other people. If you obtained a car loan, your lender will require physical damage insurance coverage on it.
Selecting a higher deductible (the amount that you personally pay before insurance kicks in) will enable you to receive an affordable rate on the cost of the policy (insurance premium). With emergency savings, you may be well placed to take out a higher-deductible policy, which will lower your premium costs.
Home Insurance
If renting an apartment or home, you should purchase contents or renters insurance to cover your possessions against loss from theft or fire. Your landlord’s home insurance does not cover the contents in your apartment, only damage to the building. Also, anyone who gets hurt in your rented house becomes your liability, not the landlords.
There are different types of home insurance:
Home-owners Insurance.
This insurance covers your possessions in addition to your home. A home-owners policy provides personal liability coverage and protects you from loss pertaining to any injuries that could occur on your property.
Your mortgage lender will also require you to have a certain amount of insurance for the duration of the mortgage. Consider having a higher-deductible insurance plan to save money.
Standard Home-owners.
This cover insures your home and all its contents against loss from theft and fire, etc. You may also obtain special insurance if you live in an area that has occurrences of natural disasters such as earthquakes, floods, tornadoes, hurricanes, etc. Your state department of insurance should be able to advise you on the insurance coverage you need if your residential area is a high-risk zone.
Home Warranty.
This is a type of household insurance that protects the home-owner from surprise expenses pertaining to replacement of major systems and other home repairs, for example, heating and air-conditioning, electrical systems, water heater, or plumbing. Sellers sometimes provide a one-year warranty at the time of purchase, with the option of renewing after a year.
Health Insurance
Medical Insurance
No one wants to worry about emergency trips to the hospital and the accompanying costs that could wipe out their retirement and emergency savings. Studies show that medical emergencies are a leading cause of bankruptcy in the USA. Research also reveals that people cut back on their prescription medication to save on money, a practice that will lead to worsening health and higher costs.
Many households that do not have medical insurance have significant levels of medical debt. Late payments and defaults are typically reported on credit reports and ultimately affect a persons score.
Whether you are shopping for insurance on the healthcare.gov website or enrolling in your employer’s insurance plan, consider your short term savings and budget. Medical insurance covers some hospitals, doctors, and prescription drug costs, but not all. Make an effort to grow your emergency savings to cover the out-of-pocket copays and deductibles.
Consider this…
Carefully estimate the total number of copays for visits to the doctor in a given year. You could be surprised to discover that the lowest-priced premiums may not be a good deal. Consider your household and medical circumstances and choose the most suitable medical coverage and deductibles carefully. If your children participate in sports, e.g., football, boxing, etc., be sure to cover them for potential sports injuries.
Tax Credits and Subsidized health care
Obamacare or the Affordable Care Act provides a tax credit to home-owners who earn between 100-400% of the federal poverty level if they do not qualify for company-provided coverage, and also if the via Healthcare.gov during enrollment season.
Those that are eligible for Medicaid can enroll at any point throughout the year. Parents may also apply for CHIP, aka Children’s Medicaid year-round. Every state provides free or subsidized health insurance for children living in low to moderate-income households. For more information, visit the U.S Department of Health and Human Services.
Basic health coverage is incredibly important for you and your family because it promotes preventive health care. You and your family’s health and wellbeing are an asset. Protect your health by having medical insurance so that you can have peace of mind to focus on other life goals, for instance, accumulating wealth.
FSA
Consider participating in an FSA – flexible spending account if your company insures you and offers it to you. A company-sponsored FSA enables employees to save pretax dollars in an account to cover copays, deductibles, over-the-counter drugs, prescription drugs, and other health costs not covered by insurance.
If employed, plan your FSA spending so that you have enough to cover your uninsured medical expenses, for not more than what you can use in a year plus two and a half months. Money left in an FSA for more than a year is forfeited on the 15th day of March, every year.
To reiterate, ensure that your emergency fund is adequate to provide a buffer against unexpected medical costs.
Disability Insurance
With improved medical technology, proper nutrition, and exercise, statistics show that human beings today have a greater risk of becoming incapacitated, than of dying before the age of 65. Disability insurance covers living expenses if you’re injured and or ill and unable to work. Most employers offer this in a benefits package. Consider purchasing this insurance even if you pay for part of the premium.
Life Insurance
Taking up life insurance cover depends on a persons situation. In the event of death, life insurance pays money to your beneficiaries. Life insurance gives financial protection to your spouse, children, parents, and even your business.
Some forms of life insurance offer investment and savings components to reduce future costs of premiums or to increase death benefits. They are, however, not a substitute for an investment or savings plan. Employers may provide low-cost term insurance, which is sufficient for young families. Personal accident insurance also provides a safety net to families and is generally affordable.
Long Term Care Insurance
If you or a member of your family got ill and need to be placed in a nursing home, who would pay for those expenses? If you do not have long-term care insurance, you would have to pay out of pocket until your assets are depleted! Only then does government assistance cover those needs. While long-term care coverage is not medical insurance, it pays for health-related items, for example, assisted living, nursing home, or in-home care.
Generally, one would need long-term care later on in their life. However, insurance premiums are less expensive when younger. Some companies give access to long-term care insurance, but employees normally have to find coverage for themselves. As with all forms of insurance, shop around, conduct research and due diligence, and pay attention to the policy’s details.